"Plunder"

[fiefoe]

It's hard not to think 'burn burn burn' as one listens to Brendan Ballou make an extended litany of all the evildoings of PE firms.

• In fact, despite their relative anonymity, private equity firms are poised to reshape America in this decade the way in which Big Tech did in the last decade and in which subprime lenders did in the decade before that.
• But the move forced ManorCare to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Moreover, Carlyle extracted over $80 million in transaction and advisory fees that ManorCare paid for the privilege of being bought and owned by Carlyle.
• Yet when Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle explained, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds—funds with names like Carlyle Partners V MC, L.P.—that did.9 In essence, Carlyle performed a legal disappearing act, and the court dismissed the Salley family’s case against the firm.
• Today, the industry owns more businesses than all those listed on US stock exchanges combined.
• As a cause and effect of this cross-pollination, the government has been extraordinarily solicitous of private equity firms. Whole private equity–owned businesses have been built based on getting government money. Where regulations stood in the way of these companies, they have been removed.
• We can do so because we’ve done it before. Today’s private equity industry bears a striking resemblance to the great “money trusts” that Louis Brandeis denounced a century ago in his book Other People’s Money and How the Bankers Use It. Then, as now, financiers captured productive companies with the savings of others.38 Then, as now, they gutted their portfolio companies, extracted fees, and forced partnerships among their various businesses.
• In 1979, Congress reduced the capital gains rate—the tax on money made from investments—and in 1981 did so again.45 Along the way, the Labor Department permitted pension funds to make riskier investments, clarifying that while such funds must exercise the caution of a “prudent man” as a whole, individual speculative purchases “may be entirely proper” under the standard.46 These two changes allowed a flood of investment in venture capital and the emerging business of leveraged buyouts.
• At the outset of the pandemic, the Fed’s chairman, Jerome Powell (himself a private equity alum), helped drive interest rates to nearly zero. As a result, and coupled with the pandemic struggles of many ordinary businesses, private equity spent an astounding $1.2 trillion on acquisitions in 2021,62 or about one-twentieth of gross domestic product of the entire country.
• Crucially, the responsibility for paying back the money the firm borrows sits not with the firm itself but with the company it buys. Thus, if the company fails, the private equity firm loses only its small initial investment.
• Private equity firms are typically entitled to 2 percent of that money every year, no matter how well or poorly their funds do... On top of this, a firm usually takes 20 percent of the fund’s profits once it clears a certain hurdle, often an 8 percent rate of return.
• here are three fundamental problems with the business model just described.68 First, because private equity firms own the companies they buy for just a few years, they must extract money from them exceedingly fast; ... Second, because private equity firms invest little of their own money but receive an outsized share of potential profits, they are encouraged to take huge risks... And third, partly because legally separate funds technically own the companies, private equity firms are rarely held responsible for the debts and actions of the companies they run. These facts of short-term, high-risk, and low-consequence ownership explain why private equity firms’ efforts to make companies profitable so often prove disastrous for everyone except the private equity firms themselves.
• After buying nursing homes, private equity firms often sell their underlying assets and separately incorporate each facility in a nursing home chain.74 This means that if there is negligence in one facility—if a resident dies needlessly—that resident’s family often can only recover assets from that facility. And because that facility no longer owns its own property, there often aren’t many assets to recover.
• Private equity firms are different. They often force the companies they own to borrow money, in good times or in bad, to pay themselves. It’s like using someone else’s credit card to pay yourself.
• Sun Capital did the same with Fluid Routing Systems and the restaurant chain Friendly’s, and both times it improbably managed to keep running the companies after bankruptcy. The whole thing is “pension laundering,” Joshua Gotbaum, the former director of the PBGC, claimed to the Post.
• even more so, private equity firms have convinced the IRS that their 20 percent income should be taxed at the lower capital gains rate than at the higher ordinary income rate.
• Varsity bought its three largest rivals, all of which are now owned by Varsity, which in turn is owned by Bain Capital.119 By controlling 90 percent of the cheerleading competition market,
• In large companies, 10 percent of employees tend to lose their jobs within two years of a private equity firm’s acquisition.
• *LEASEBACKS. DIVIDEND RECAPS. Bankruptcies. Forced partnerships. Tax avoidance. Rollups. Layoffs. These are the tools by which private equity makes its money.
• Over and over, DeMarco refused to accept the Principal Reduction Alternative program for the Federal Housing Finance Agency, or FHFA, which oversaw Fannie and Freddie, arguing that to do otherwise would constitute a grave “moral hazard.”23 This was a confusion of the term. Helping homeowners would create a moral hazard only if people knew that buying a home was a risky investment (historically, it had not been) and if they expected a government bailout when their investment soured (there was no reason for them to expect this)... DeMarco and his agency acted quickly and took the extraordinary step of using the Federal Register—the official public record of the federal government—to threaten the municipalities. The FHFA said that it had “significant concerns” about the use of eminent domain to reduce mortgage principals
• But it proceeded, nevertheless, allowing Invitation to borrow money at a lower rate and thus acquire more houses to rent. In other words, having refused to do all it could to help people keep their homes, Fannie was now using all its powers to help private equity firms buy those homes up.
• This sort of influence—the scale of money spent, the focus and organization of the group that spent it—simply would not be possible among more dispersed owners. By concentrating economic power, private equity firms centralized their political power and codified their influence to the detriment of the many tenants
• By concentrating their purchases—by exercising control over local markets—private equity firms made it difficult for people to leave.
• PRIVATE EQUITY FIRMS’ adventures in housing illustrate the industry’s worst tendencies. They bought up hundreds of thousands of homes, raised prices, and reduced quality. They did not demonstrate particular skill in administration, as the follies of Nationstar illustrate. But they did demonstrate enormous political strength, as shown by their defeat of Proposition 10 in California. Finally, they targeted, not those with the most money in America, but those with the least.
• Bankruptcy is an opaque, enormously complex process and one where great lawyering (though not necessarily great business acumen) is rewarded. Private equity firms thrive in this part of the law
• by successfully proposing a 363 sale, Friendly’s lawyers were able to take control of the bankruptcy process and largely choose who would buy the company’s assets. <> And here’s where private equity showed its genius. Sun Capital, through Friendly’s, proposed to sell the business to… itself. One of Sun Capital’s subsidiaries was Friendly’s owner. But another Sun Capital subsidiary was its largest lender84 and had loaned Friendly’s $152 million, which had blossomed to $268 million with interest... Sun Capital was allowed to bid both the principal and interest for the company, meaning that it paid just $152 million for a possible $268 million bid. Nobody else could hope to pay so little for so much.
• But much of this may also have to do with private equity firms’ ability to choose their venue. In 1979, Congress revised the bankruptcy code to give companies wide latitude to choose where to declare bankruptcy... but increasingly White Plains, Houston, and the Eastern District of Virginia (where the Toys “R” Us case was filed). Today, more than 90 percent of the country’s big bankruptcy cases happen in these five districts.
• But most importantly, they started meeting with the private equity firms’ investors. Across a dozen states, they met with fourteen pension funds,126 and at their urging the Minnesota State Board of Investment suspended investments in KKR until it investigated the Toys “R” Us employees’ claims... it was this threat of the loss of money that forced private equity firms to change.
• Reinhart died in early 2021 from COVID-19.138 But before her death, about her organizing, Reinhart said, “Nothing but good has come out of it for me.”139 In an obituary in the New York Times, Alison Paolillo, who worked with Reinhart, said that “[s]he was our voice.… She fought for us.”
• (David Rubenstein:) In another deal, Carlyle bought the airline food service company Caterair and, at the suggestion of a Republican political operative, brought George W. Bush, the then flailing son of the current president, George H. W. Bush, on its board.
• registered nurses and nursing assistants have among the most musculoskeletal injuries of any profession, and nursing assistants in particular are injured more often than are police, correctional officers, and even construction workers
• Illinois inspectors said that no one was harmed when inadequate housekeeping led to a maggot infestation on a resident’s scrotum.
• Nearly three-fourths of nursing homes in the United States now use “related parties” to take money from their core nursing homes... Unsurprisingly, facilities that use related companies have, on average, lower staffing, more complaints, and higher rates of patient injuries than those that do not.
• the state’s governor had signed a broad immunity shield just the day before. Ballard’s family had no way to hold Genesis accountable, or even to investigate through litigation if Genesis had been negligent or responsible for the widespread outbreak in its facility.
• in bankruptcy, the nursing home was able to discharge almost all the damages that Ruckh had won. In the end, Ruckh and the Department of Justice settled for just $4.5 million in damages, with three-quarters going back to the government and one-quarter going to Ruckh.125 It took ten years, and Ruckh got $1 million for fraud that cost taxpayers $80 million.
• Steward’s intensive care patients received, on average, four fewer hours of nursing care every day than did patients at other, similarly sized hospitals.
• A particular indignity to bankers, many of these companies were required for the first time to report aspects of their executives’ compensation. <> Under this new scrutiny, the investment banks pulled back from many of their riskiest investments. Something needed to fill the void, and that something was private equity... just like the investment banks, private equity firms threatened to become too big to fail
• In the wake of the Great Recession, private equity firms became leading lenders of private credit as investment banks receded from the business. Now, Blackstone and Apollo have the largest private credit funds in the world, right after the behemoth Japanese firm SoftBank Group.
• while the private credit market is vastly smaller than the US mortgage market, it is growing rapidly, from barely $100 billion in investable money in 2005 to over $900 billion in 2021.15 In other words, the same dynamic that started the Great Recession may be happening here, albeit at a smaller scale.
• The migration from investment banks to private equity firms means that the great mass of talent in finance is shifting to ever-less regulated and transparent parts of the industry. It means that inequality, as expressed in the extraordinary pay of private equity executives, continues to grow.
• Together, private equity firms spent almost $40 billion buying insurance companies in the United States and today control over 7 percent of the industry’s assets... It also means, as explained momentarily, that people’s insurance policies—including potentially your own—may be less safe.
• By law, insurers have to keep money in reserve—capital requirements are set by state regulators—to pay out their benefits. But private equity firms have set up complicated schemes to avoid these restrictions. In particular, several created reinsurance companies—insurers for insurers—in Bermuda, and sold US policies to them.
• The industry also lobbied—successfully—to access 401(k) funds, including, possibly someday, your own. This change matters because the money that private equity firms need to finance their acquisitions and other endeavors has traditionally come from the very rich, from endowments and sovereign wealth funds, and from pension funds. But in recent years, the industry largely exhausted these resources.
• Under the new rules, collect calls would cost twenty-five cents a minute. It was an enormous accomplishment and one that the phone companies and their allies in state government sued to stop. But before a court could even reach a decision, Donald Trump was elected president and appointed a former Verizon lawyer, Ajit Pai, as chairman of the FCC. One week later, in a highly unusual move, Pai said that the commission would refuse to defend much of its own regulation... Looking back on the whole reform effort, Clyburn lamented the entrenched forces, including local law enforcement, who defended the current system. “There are just too many critical people that are being enriched,”
• In Keene, New Hampshire, for instance, when the local jail signed a teleconferencing contract with Securus, it agreed to ban all in-person visits with family members.
• In fact, the Consumer Financial Protection Bureau (CFPB) found that over 80 percent of payday loans were renewed or refinanced within two weeks.17 For the vast majority of these “loan sequences,” the principal on the most recent loan was the same or larger than the principal on the first, meaning that for the duration, the borrower was paying only interest and fees to the lender, rather than escaping the debt.
• In the rare arbitrations in which consumers actually won, they were often bound by nondisclosure agreements that prevented them from publicizing their victories and notifying people like them of the opportunity to sue. At the same time, victorious plaintiffs in arbitration did not develop any precedential case law—as they might through ordinary litigation—that fellow consumers could rely upon.
• WHILE PRIVATE EQUITY firms worked hard to insulate themselves from legal liability generally, two other, broader developments in the law helped the industry: the fall of class action lawsuits and the concomitant rise of forced arbitration.
• The industry that private equity entered had a miserable reputation and deservedly so. For every dollar of tuition they received, for-profits spent just 29 cents on instruction, compared to 84 cents at private colleges, and $1.42 at public universities.72 Students who attended for-profit bachelor’s programs left, on average, with $14,000 more debt than their peers in nonprofit colleges.73 And while for-profits enrolled just 8 percent of students, they accounted for 30 percent of student loan defaults.
• Ashford: At a time when the school had over seventy thousand enrollees, its online degree program allegedly had just seven full-time faculty.82 A study led by Senator Tom Harkin found that in 2011, the school had over 1,700 recruiters
• In 2014, the Obama administration issued the “gainful employment” rule... President Trump’s secretary of education, Betsy DeVos, was an advocate for for-profits and delayed the rule, suspended it, and proposed rewriting it, before ultimately rescinding it in 2019.134 Along the way, her department acknowledged that doing so would cost the government $6.2 billion over ten years... All of which is to say that, nearly a decade after the rule was first promulgated, for-profit colleges and their private equity owners are not bound by any gainful employment regulation.
• IN THE STORIES above—in infrastructure, emergency services, and higher education—private equity is both a symptom and a cause of the problem. Though the basic logic of private equity made life worse for people who depended on running water, reliable ambulances, and affordable education, private equity only entered these businesses because governments chose to reduce their commitment to residents.
• On average, emergency room patient costs increased 83 percent after the company took over.
• IF PRIVATE EQUITY exercised power in Congress to protect its ability to issue large medical bills, it demonstrated overwhelming—and overwhelmingly successful—force to protect its prized tax benefit: the carried interest loophole.
• But private equity firms have also been effective in convincing Congress to, quite simply, give them money. For instance, at the outset of the pandemic, the industry received over $5 billion in federal assistance, in part through programs meant to help small businesses.
• SURPRISE MEDICAL BILLING, carried interest, COVID funding, and so much else: these issues illustrate Congress’s failure to legislate or oversee—and at times, its outright capture by—private equity.
• Or perhaps, more darkly, America in 2023 is Germany in 1933. There, giant corporations—in particular, the chemical manufacturer IG Farben—supported the Nazis at crucial moments and helped bring Hitler to power.
• And then, slowly, fitfully, with terrible defeats and disappointments, something changed. The rural Grangers and populists and, later, urban progressives led multiple movements to remake America. In the twenty years from 1901 to 1920, they started the first antitrust movement and broke up the steel, tobacco, sugar, and oil monopolies. In Congress, they established eight-hour workdays for interstate rail workers
• on balance, they remade America for the better and laid the social and organizational foundation for the New Deal a generation later. Arguably, the post–Second World War boom, which brought about the greatest middle-class prosperity in American history, happened because of the work that began at the turn of the century. <> History here has a funny rhyming quality.
• States can update their sometimes comically out-of-date lists of personal property exempt from collection: until 2011, for instance, Massachusetts protected two cows, twelve sheep, and two swine from being taken by debt collectors, but only a car worth up to $750.
• most importantly, public pension funds, which provide nearly half of firms’ investable money.